The Role of Industrial and Market Symbiosis in Stimulating CO2 Emission Reductions

Abstract

An increasing concern for climate change puts pressure on industrial firms to achieve carbon emission reductions. These could be realized through cooperation among firms in industrial chains, which leads to industrial symbiosis. By taking a real options approach, we make the timing component of the investment decisions explicit. This is important in assessing the impact of carbonreducing investment over a specific time-span. We show that a joint venture between a CO 2 emitting firm and a firm that can use the CO 2 will result in a higher probability that an investment in CO 2 capture will take place within a specific time period, which reduces the amount of CO 2 emitted substantially. We also show that, in addition to industrial symbiosis, cooperation between firms can benefit from "market symbiosis" as well, in the sense that investments are more likely to take place in markets that are positively correlated. This is an important result, given that the EU has set binding targets to its Member States for reducing their emissions.

Using Real Options Thinking to Value Investment Flexibility in Carbon Capture and Utilization Projects: A Review

“…Assembling the results from the first and second search query created a literature set of 13 unique studies. Finally, four additional papers that were previously known to the authors for their application of real options in CCU projects were added [17][18][19][20]. The selection of the literature set is shown in Figure 1.…”

“…Moreover, the application of real options can help to demonstrate how the presence of different uncertainties affects these threshold levels. Twelve papers from the reviewed literature set investigated the optimal timing of investments by determining the investment threshold levels of CO 2 price [17,19,31,33,34,37,39,42], oil price [17,32,33,42] and/or CO 2 utilization rate [37]. Yao et al [38] calculated the investment probability in the CCU project over different stages of the project; (2) Project valuation-valuing flexibility (VF): Besides determining the optimal timing of the investment, project valuation by real options analysis can also include the valuation of the flexibility that is embedded into the investment decision.…”

“…Zhu et al [40] investigated three different business models between a coal-fired power plant (CFPP) and a oil producer with different contract terms: a fixed CO 2 price; an oil-indexed CO 2 price; and a joint venture contract. Compernolle and Thijssen [17] compared the investment thresholds for a CFPP (CO 2 capture) and an oil producer (CO 2 -EOR) on a stand-alone basis with their investment thresholds in a joint venture.…”

“…As CO 2 price is subject to both policy and market forces, it is included as a separate type of uncertainty for CCU projects. The majority of the reviewed studies (13) described the evolution of the price of CO 2 using a Geometric Brownian Motion (GBM): the CO 2 price follows a non-stationary stochastic process with constant drift and variance [7,[17][18][19][31][32][33]35,[37][38][39]41,42]. Zhu et al [40] included CO 2 price as an uncertain parameter in a sensitivity analysis and Welkenhuysen et al [34] treated CO 2 price as a stochastic parameter in a Monte Carlo simulation.…”

“…Due to the dominance of CO 2 -EOR as a CCU technology in the literature set, the most common source of market uncertainty was oil price. Six studies characterized the evolution of oil price by a GBM [17,31,33,36,38,40], one study included different levels of oil price in a sensitivity analysis [39], another study included oil price as a stochastic parameter in a Monte Carlo simulation [34] and two studies described the evolution of oil price by a mean reversion process [32,42]. One study in particular applied the Ornstein-Uhlenbeck model [42], which is the most simple mean reverting process.…”